Woodward profits off push for fuel savings

FORT COLLINS – Woodward Inc. is adding employees, developing plans for a new manufacturing facility in the United States and expanding operations in Poland and China.

Last year, it set a record of $132 million in net earnings and raised its dividend by 12.5 percent.

In short, the more than 140-year-old company and its investors are enjoying good fortune.

The company seems poised for even greater growth as its customers develop next-generation aircraft that include better fuel-efficiency controls.

Fuel can make up more than 40 percent of an airline’s cost, so airlines are demanding greater fuel efficiency in their planes, Woodward CEO Tom Gendron said. Meanwhile, European countries have targeted fuel-guzzling planes with emissions taxes.

Aircraft manufacturers are responding by updating their designs, which is good news for Woodward.

“What’s going to happen in the next five years is they’re all going to be updated,” Gendron said. “We’ve done really well securing content on almost every one.”

The decade ahead

The Fort Collins-based company’s operations span the globe, with production, service and engineering facilities nationwide as well as in Asia, South America and Europe. It employs 6,500 worldwide including about 1,200 in Loveland and Fort Collins.

Woodward manufactures fuel-control systems for the aerospace and energy markets. The company reported nearly equal sales in both sectors last year.

In the aerospace sector, Woodward’s technology is found on aircraft engines and airframes for commercial and defense aircraft.

Air travel trends look good for the company. Global and domestic passenger miles have increased since 2009, according to the Bureau of Transportation Statistics.

“The more they fly, the more after-market revenue there is,” Gendron said. “That’s very good for our business.”

“We’re forecasting over the next decade a lot of growth in aerospace,” Gendron said.

The Boeing 787 Dreamliner and 747-8 as well as Airbus A320 are among the aircraft for which the company produces “content” that has helped it expand.

On the military aerospace side, key programs that have remained stable or have grown include fighter jets – the F/A-18 E/F and F-35 – as well as Black Hawk and Apache helicopters.

Woodward’s transition from making individual parts to entire fuel systems has helped it grow, said Fred Buonocore, a senior industrials stock analyst for New York City-based Rodman & Renshaw, which does not own Woodward securities.

As an example, Woodward makes the fuel system on the GEn-X-powered Boeing 787, Buonocore said.

“As you start to see the 787 production ramp up, which it will do later this year and then more significantly so in the following years, that’s the driver of revenue growth,” he said.

Aircraft updates have driven up Woodward’s research and development spending by 40 percent to $116 million.

Growth also will come from Woodward’s involvement in General Electric and Snecma’s LEAP-X, a turbofan engine that will power the next generation of single-aisle commercial jets.

Those engines will be the only option for upcoming Boeing 737 models and one of two engines offered on the Airbus A320, Gendron said. The company also will develop content for Pratt & Whitney’s engine for the A320.

Woodward also will make motion-control system components for the U.S. Air Force’s KC-46 tanker, a Boeing aircraft that refuels planes in the air.

Also, the company helps produce smart weapons that use lasers or Global Positioning Systems technology to reach their target, another growth area.

Woodward believes that its components in natural-gas turbines will feed its growth as power-generation demand rises.

Natural gas and renewable energy will play an increasing role in supplying energy to the world by collectively meeting almost two-thirds of incremental energy demand through 2035, according to the International Energy Agency.

That means companies will spend a significant amount of money to beef up natural-gas infrastructure, Gendron said. Woodward will manufacture control systems for the equipment.

“We play in every area of natural gas,” Gendron said.

Worldwide expansion

Woodward’s competitors in aerospace and energy sectors include well-established companies such as Honeywell, Robert Bosch AG and Siemens.

But new competitors face considerable barriers to entry into many of the company’s markets, including government-mandated certification requirements, according to Woodward.

Woodward soon will decide where to locate a new U.S. manufacturing facility. Though it won’t be located in Northern Colorado, the company is looking to bring aerospace engineering to the region. Its operations here are, for now, focused on its energy sector.

Woodward recently completed a new 48,000-square-foot test facility in Rockford, Ill., to support development of aerospace fuel systems.

Woodward also has seen international expansion. In 2011, it acquired all outstanding stock in Integral Drive Systems AG and its European divisions, including the assets of the company’s business in China.

That will help the company expand its renewable energy portfolio through advanced technology to convert wind and solar energy to grid-compatible power, Gendron said.

The industry faces upcoming challenges, such as the expiration of the wind production tax credit, but Gendron believes renewable energy will play a greater role in the future.

Gauging the long-term

Woodward’s sales present both blessing and risk.

About 34 percent of consolidated net sales in fiscal 2011 came from the company’s top five customers, which included General Electric, Boeing and United Technologies.

A decline in business with, or financial distress of, those customers could hurt Woodward.

But Gendron points out that Woodward provides a variety of parts for those growing companies.

“The long-term outlook we think is really positive,” he said.

The company also contracts with multiple U.S. government agencies, including all military branches, Department of Defense and the National Aeronautics and Space Administration. Sales made directly to government agencies or indirectly through third-party manufacturers using Woodward parts amounted to 19 percent of its fiscal 2011 sales.

Woodward’s own annual report outlines as potential risks changes in congressional appropriations and procurement laws as well as the company’s status as a subcontractor in most cases.